Warrants used to seize documents and computer files from the homes and offices of the Mayfair property tycoons Robert and Vincent Tchenguiz have been over-ruled by two high-court judges in a bitter blow to the Serious Fraud Office.

The investigation into what were suspected corrupt dealings between the Tchenguiz brothers and the executives at the Icelandic bank Kaupthing, which failed in 2008, was the largest pursued by the SFO in almost 10 years.

But the SFO has been criticised by two of Britain's most senior judges during a lengthy judicial review of its investigation. The SFO has already conceded that its suspicions over Vincent Tchenguiz were based on errors and were, on closer examination, without grounds. He was dropped as a suspect.

However, despite the court judging that error-ridden warrants in relation to Robert Tchenguiz should be quashed too, the SFO insisted it would go ahead with its inquiry. After the judgment, Robert said he would seek damages from the SFO over his arrest last year.

The brothers were arrested and questioned in March 2011 in an inquiry into the collapse of the Icelandic bank Kaupthing; both were released without charge pending further investigation. "We note that the court declined to consider the merits of the future of the investigation, this being the responsibility of the SFO as an investigating and prosecuting authority. The SFO will continue with the investigation with renewed focus and vigour," the office said in a statement.

Two senior high-court judges ruled on Tuesday that the information presented by the SFO during a 20-minute hearing to obtain the warrants 16 months ago was riddled with errors and failed to present all the facts to the sitting judge.

Sir John Thomas and Mr Justice Silber said the judge who granted the order was "given an account that was not only wholly inadequate, but unfair".

Robert said he and his "family have suffered enormous damage, not least to my reputation". He added: "I also intend to bring proceedings against the SFO in respect of my arrest."

The judgment also heavily criticised the SFO, and in an unusual decision, the judges called on the government to increase its funding. "It is clear that incalculable damage will be done to the financial markets of London if proper resources, both human and financial, are not made available for such investigations and prosecutions."

With the investigation into Robert still ongoing, the high-court judgment said: "It is very important that proceedings of this kind are confined to the issues that strictly arise, and are not utilised as a means of indirectly seeking the court's view on an investigation."

It ruled that the information given presented to a crown court judge failed to lay out the facts, while the judge's failure to give a reason for providing the warrants was also criticised.

It said the failure was "a grave and material omission, which resulted in the judge not being given a fair presentation of the key issue in the case – was this a case where Kaupthing made a wrong commercial decision in December 2007 … or was this dishonest and collusive lending?"